SIP may not be perfect; but it’s Small Investor’s Best Bet

If you are a mutual fund SIP investor, you would already have been bombarded with thousands of articles about why mutual funds and more particularly mutual fund SIPs are great.

And that is true.

But I wanted to re-highlight this fact in a different light.

SIP is not perfect like the theoretical (but attractive) concept of Buying-Low-Selling-High. But still, it works best for small investors and is their best bet when it comes to equity investing.

I recently wrote an article for MoneyControl on this topic. If you wish to understand why SIP isn’t Perfect but still the small investor’s best bet, then please do read the article by clicking the link below:

[Click to read] – SIP isn’t Perfect; but it’s the Small Investor’s Best Bet

Hope you find the article useful.


Case Study – Do You Have Surplus Money To Put Aside for 5+ Years? Then You Should Read This

Note – This is a guest post by Ajay who sometime back, shared his experiences with Mutual Fund investing in the post titled HowI Created a Corpus of Rs 3.7 Crores in 10 Years and its second part.
Go and ask any financial advisor about the best available options for investing for average investors, and chances are that he will recommend using SIP (or Systematic Investment Plan) and rightly so (as proved here).
But while SIP may be the best tool for someone who wants to slowly and steadily build wealth using monthly investments…what should a person do if he has surplus money to invest?
Let us suppose you have Rs 10 Lacs to spare. Where will you put that money? Savings Account? Fixed Deposits? Or direct stocks? (But no matter what you do, please don’t do this with Your Rs 10 Lacs)
Or would you do a SIP or STP (Systematic Transfer Plan)?
But what if you somehow, decide to invest the entire amount in one go? And if invested in one go, what should be the time frame for that investment? And what are the risks involved in doing so?
This post is a case study to answer some of the above questions.
But before we go ahead with this case study, let us try to answer a few questions as honestly as possible:

  1. Do you feel comfortable investing lump sum money in Equity Funds?
  2. If yes, what is the time frame you are comfortable with for this investment? – 1 year / 3 years / 5 years / 7 years / 10 years.
  3. Do you think a 5-Year Tax Free FD returns would be safer (and more) than a Mutual Fund for the same duration?

So now lets go ahead with our analysis…
For the purpose of this case study, I have chosen Franklin India Prima Plus Equity Fund (FIPPF). And returns of this fund have been compared with return of a 5-Year Tax Free Fixed Deposit. There is no specific reason for choosing this fund. It is more of a random choice. In fact this fund does not feature in the list of top funds regularly – but has been a steady performer in the long term. It is also a diversified large cap oriented fund and owns high quality stocks.
A period of 20 years (i.e. starting from 1995 and upto 2015) was considered for this study. This period has been full of economic booms and recessions and dull periods. As we are evaluating 5-Year period, in 20 years between 1995 and 2015, we have a total of 16 Five-Year periods.
5-Year annualized return of FIPPF was calculated as per the NAV of the fund – based on the investment start and end dates. Accordingly, value of Rs 1 Lac invested in FIPPF for each of these 16 Five-year periods was calculated. 
For comparison, the above calculation was repeated for all these 16 Five Year Periods for 5-Year Tax Free Deposits. (The Interest rate for 5 year FD for each corresponding period was taken from RBI website.)
Note 1 – Sensex PE Ratio for all the periods was obtained from BSE website. The site does not have PE data for periods before 1995.
Note 2 – The start and end dates of the investment were considered as 1stJan of the corresponding years.
The results of the analysis are given in table below. And the observations follow the table:

  • Out of the 16 Data points (for 5 Year periods), lumpsum investments in the FIPPF gave annual returns ranging from 3.56% to 54.89%. In comparison, returns of FD (Tax-Free) ranged from 5.5% to 13%.
  • Out of 16 data points, FIPPF gave single digit returns twice i.e. 3.56% & 6.96%. Also, twice it gave abnormal returns of 54.89% & 47.30%. Both these excesses (great for those who got it), were because of the amazing bull run which ended in 2007-2008.
  • If we were to remove these outliers on both up and down side, FIPPF returns ranged from 15.14% to 37.89%. Range of returns from FD remain same at 5.5% to 13%.
  • There was not even a single period in these 16 data points, where FIPPF gave negative returns.
  • 12 times out of 16, FIPPF gave returns between 15.14% and 37.89% annualized. This points to 75% chance of achieving similar results. And if we were to add the outliers on higher side, it will be 14 out of 16 times – which is more than 85% chance of making superior returns.
  • In Rupee terms, Rs 100,000 invested in FIPPF could have grown anywhere between  Rs 119,193 to Rs 891,663 (in blocks of 5 years over 16 such periods). If the excesses removed on both up and downside (caused mainly because of 2007-08 bull market, followed by crash in 2008/2009), then Rs 100,000  invested in FIPP could have grown anywhere between  Rs 198,821 to Rs 498,596. Majority of the times, Rs 100,000 invested in FIPP would have grown to a value between Rs 200,000 to Rs 300,000.
  • On the other hand, Rs 100,000 parked in a FD would have grown to a maximum of Rs 184,243 (at 13% peak FD interest rate). And most of the times, Rs 100,000 invested in FD would have grown to a value in between Rs 135,000 to 160,000.
  • Did market’s P/E Ratio dependent entry points make a big difference to the 5 Year annualized returns? The answer is Yes. But there is no specific pattern. A lump sum investment made in 2009, at a low PE of 12.21 (supposedly a superior entry point) gave annualized returns of 18.5% over the next five years. But on the contrary, an investment made in 2010, at a relatively high PE of 22, gave an annualized return of 16.76%.
  • Investment made in 2008 at very high PE of 25 gave the lowest return of 3.56% in the next five years. Therefore, entry at this and similar high PE points should be avoided. Except for this high PE point there is no much correlation between PE and returns. So as long as the PE is anywhere less than 21, even lump sum investing may work.
  • Did PE exit points make a big difference to 5 Year annualized returns? Yes, but again there is no specific pattern. A 27% annualized returns was made even after exiting at 13.74PE in 2003. Again, 18% annualized returns were made, even after exiting at 12.21PE (near very low PE point) in 2009.
  • One significant point to note from this analysis is that the fund NAV doubled (minimum) or tripled or more in most of the 16 data points. Though we are generalizing here, you can safely expect that in five years, chances of getting decent returns (better than FDs) are much more in equity mutual funds. And this is a very important observation.
Now after having gone through the above analysis, let us re-visit the questions we asked ourselves earlier…and see if we are in a better position to answer them now…
Do you feel comfortable investing lump sum money in Equity Funds?
Yes. But only when investing for more than 5 years.

If yes, what is the time frame you are comfortable with for this investment? – 1 year / 3 years / 5 years / 7 years / 10 years.
The minimum investment period should be 5 years. However, there is still a possibility of loss of capital if invested for anything below 5 years. Based on above analysis, an investment for 5 years in a decent mutual fund lowers the risk of loss of capital substantially.

Do you think a 5-Year Tax Free FD returns would be safer (and more) than a Mutual Fund for the same duration?
Based on above analysis, it is most likely that returns from MF will beat those of FD, significantly. But there will be inter-year volatilities.
I think that many of you would have some more questions about this analysis. I have tried to come up with a few myself and tried answering them too. So please read further…

What happens if the investment time frame is reduced to a period of less than 5 years for lumpsum investment?
There is a high possibility of loss of capital (and not only lower returns). You can easily see the NAV of the fund, which nearly doubles every five years, but falls significantly for some shorter periods (less than 5 years).

What happens if the investment time frame is increased for lump sum investment to something like 7 or 10 years?
On a 7-Year basis, the same fund shows a minimum annualized return of 9.92% and highest of 39%. If excesses are removed on both sides, the range of returns is between 15% and 36%. This is based on 14 data points.
For 10-Years, the results are extremely encouraging. The same fund shows a minimum of 18.29% and highest of 40.26%. If excesses are removed on both sides, the range of returns is between 20% and 28%. This is based on 11 data points.

Do you have the similar analysis for 7-Years and 10-Years data? 

Do you think the high returns shown on this analysis are some what guaranteed?
No. Please don’t think so. There is no guarantee that what has happened in past will also happen in future. However, chances of such returns being delivered if one invests for long term are quite high. Although this analysis of 20 years has witnessed a lot of market action, I believe that the mega bull run of 2004-2008 distorts the figures and the analysis. We may or may not get similar bull runs in future and this fact, is likely to impact future returns. Therefore it is safe to assume the lower side of the returns, say about 15% – which I strongly believe is achievable.
If you didn’t get these kind of returns over a 5 year period (like Zero Returns of 2008 to 2013), then it is only a matter of time. And you should be ready to stay invested for longer periods like 7 and 10 years. In other words, even if you come to the market with a time frame of 5 years, be prepared to stay invested for longer…upto 10 years to achieve the desired result.

Did this analysis find something which no one has found in past?
Certainly not…In fact, Prashant Jain of HDFC once said that Indian Indices double approximately in every 5 years. This analysis actually proves that statement of his (atleast approximately). Also, this analysis endorses the fact that Time in Market is more important than Timing the Market.

So should you just go out there and invest in Equity Mutual Funds right away?
No. Please don’t do it. If you have surplus money to invest, do the following:
– Decide the amount you want to invest.
– Decide your time frame for this investment amount.
– If your time horizon is less than 5 Years, equities are a strict no-no. If its more than 5 years, check your asset allocation and then decide whether you can (and should) add money to equities or not. If you decide to go for equity MF, you should be prepared to remain invested for more than 5 years too…if the desired returns are not achieved. If you cannot wait for so long, then you are better off with debt and fixed deposits. And if your time frame is 7 to 10 years, then look no further. Simply invest in a diversified equity mutual fund in lump sum mode. But just make sure that PE of broader markets is not more 24 – which means highly overvalued. And if it is, then you should wait for the market to give a better entry point.

Do you mean Lumpsum investing is better than SIP investing?
No!! Not at all. If you have surplus lump sum money to invest…and you are well aware that you don’t need this money for next 5 or more years…and also that you are capable enough to wait a few years more if required…only then you should invest in lump sum.
For an investor who invests a small portion of his savings on a monthly basis, SIP is the best way to go about his investing. He should stay away from lump sum investing. And even for SIPs, the minimum investment period should be 7 years plus.

What is your final conclusion of the above analysis?
While 5 years is a decent time frame for investing, it is still a better option to invest for a 10 years time frame. As long as the market PE is less than 24, invest with 10 year time frame, only in very high quality, long term proven, large cap, well diversified equity mutual funds in lump sum mode. If the market PE is more than 25, better wait for a more sensible entry point below 24 (or even lower) and invest your surplus in lump sum mode.
And please do not discontinue your SIPs no matter what.
Disclosure: I am an individual investor sharing my personal experience and writing this article to educate myself. I have no interest in buying or selling any of the funds mentioned in the above analysis. Investors reading this should do their own analysis and take their own investment decisions. Or if required, consult their financial advisors before making any investments.

Power of Increasing Your SIP by 5% or 10% Every Year

A few days ago, I did a post on How You Could Create a Corpus of Rs 8.4 Crores Starting with Just Rs 10,000 every month. In the post, I analyzed following 3 scenarios over a period of 30 years (with approximate results):
  1. A Fixed SIP of Rs 10,000 every month (= Rs 3.24 Crores)
  2. An Increasing SIP, Starting with Rs 10,000 every month & 10% Annual Increase (= Rs 8.40 Crores)
  3. A Fixed SIP of Rs 26,000 every month (= Rs 8.40 Crores)

In all the above scenarios, the assumption for annual returns was 12%. Now this number, according to me is quite conservative because of the following points:

  • In last (almost) 2 decades, Indian markets have given higher returns (in excess of 15%).
  • Well diversified, actively managed mutual funds have delivered returns of more than 18% for almost a decade.
  • If risk-free instruments like NSC, PPF give close to 9% return, then there is no point going for equities as an investment class if expectations are less than 10%
  • Indian Growth Story is still intact. And till the time India becomes a developed economy, it will continue to grow at a reasonable pace. My guess is that India is still 25-30 years away from becoming a mature and (real) developed economy – in terms of quality of life, industrial might and similar things.

The last point is my personal assumption (speculation). And there were few readers who had the view that 12% average returns in not sustainable for next 30 years. Some of the views were that as the economy grows and matures, inflation would stabilize and reach levels close to 2-3% as in the case of US and other developed economies…so figuring in dividend yield and the equity return risk premium, Indian markets might give 9% to 10% return 30 years down the line… AND….Premium above inflation is bound to reduce as inflation decreases as the economy matures.

Now I am not saying that my assumption of 12% is hundred percent correct. What I am saying is that I am slightly more optimistic about India in next 30 years. I know I will not get 20% returns from market. But I ‘think’ I will be able to make more than 9% average returns over the next 30 years. Because if I am not able to manage that, then I will rather buy risk-free options like PPF, NSC, etc.

MF SIP Investing Cartoon

But more importantly, what I think a lot of people are missing in last post is the fact, that the 3 scenarios discussed show the real power of long term, sensible investing.

Ask anyone who is close to his/her retirement and chances are that they may not have crores in their retirement funds. I have people asking me questions like ‘What should I do if I have Rs 10,000 every month to invest?’ 

The previous post is an answer to that. No matter where you are and what your current financial state…you can start now!

Believe me… Equities have the ability to make you rich. Really rich… All you need to do is to be disciplined and stick to simple investment ideas.

Note that in all the scenarios, we are assuming a 30 year tenure and equity return of 12%. These numbers can change depending on change in tenure and equity return…you can either keep an assumption of 10% for next 30 years OR 12% for first 20 years and 9% for remaining 10 years. But the overall conclusion remains same – Do your SIP diligently, however small it may be. And whether or not, you are able to increase it every year. You will be positively surprised at the money you have accumulated at the end of all those years.

Case Study: How To Accumulate Rs 8.4 Crores? Starting Only with Rs 10K every Month?

Some time back, I made my 7 resolutions for 2015. One of the resolutions which I made was to increase my mutual fund SIP contribution this year by atleast 10%. This initially may seem like a simple thing to do, but believe me…it can have a really big impact on how much wealth you can accumulate eventually.

And this is what I will try to convince you about here…

Let us suppose that I stay in a job for next few decades. I turned 30 few days back. So for all practical purposes, I have another 30 years before I retire.

Let’s also assume that as of now, I do not have any savings or investments.

Now let’s take up 3 different scenarios:

Scenario 1

I start a SIP of Rs 10,000 every month for next 30 years. I am making a conservative assumption that a well diversified mutual fund scheme will be able to deliver 12% every year. There are schemes in India which have done almost double of that for almost a decade. But lets not be over-optimistic, and stick to 12% for this and other scenarios.

So after 30 years of Rs 10K monthly investment, the corpus will finally reach a cool Rs 3.24 Crores!! Details of the calculations can be found in image below. Please click to enlarge it:

Scenario 1: SIP of Rs 10K for 30 years

Scenario 2

I start with a SIP of Rs 10,000 every month. But for next 30 years, I increase my SIP contribution by 10% every year. i.e. I invest Rs 10,000 per month in first year…followed by Rs 11,000 every month in second year….Rs 12,100 in third year..and so on. Here again, the return assumptions are kept at a conservative 12%.

So after 30 years of increasing SIPs (which started at 10K a month, with 10% annual increase), the corpus will finally reach a (way cooler) Rs 8.40 Crores!! Details of the calculations in image below:
Scenario 2: SIP starting with Rs 10K, which increases 10% every year for next 30 years
So you see the difference. A simple 10% increase in your monthly SIP, more than doubles your final corpus. Not bad.

But wait…..

You must be wondering that instead of just increasing this SIP every year, what would happen if you started with higher amounts and kept it constant?

The answer to your question is provided in the third scenario.

Scenario 3

To achieve a corpus which is almost equal to one achieved in second scenario, i.e. Rs 8.40 Crores…you need to start with, and continue paying Rs 26,000 every month. Once again the detailed calculations are given in image below:

Scenario 3: Constant SIP of Rs 26K for next 30 years
As you see in second and third scenarios, you can achieve the same target amount (Rs 8.4 Cr) by choosing two different approaches. So question now is…

Which one to choose?

At first glance, it might seem that increasing SIP is better than Constant SIP as it is more convenient. It also seems to be in line with a simple common-sense based thought that:

Income Rises – Expenses Rise Too – So Should Investments

Why should SIP be kept constant when your income is rising? Your investment (through SIP) should also increase. Think for yourself… If you started a 10K SIP when you were earning 50K some years back, and you are proudly flaunting this 10K SIP even today…when currently you earn more than Rs 1.5 lac a month, then it is something stupid. You wont become rich!

An important point to consider here is that even though both scenarios result in Rs 8.4 Crores at the end of 30 years, the total investments made by you in both cases will differ substantially.

In scenario 3, the SIP is constant at Rs 26,000 for all 30 years. Whereas in increasing SIP model, you start with Rs 10,000 and it continues to increase every year. In 12th year, the SIP amount in increasing SIP scenario crosses Rs 26,000 (equal to constant SIP value).
In year 18, monthly SIP will exceed Rs 50,000. In year 26, it will exceed Rs 1 lac a month.
When you compare these numbers with constant SIP number of Rs 26,000, these might seem like very big numbers. But decades from now, these would be very small numbers considering the increase in annual income and inflation, etc.

But as I said, total investment in both cases will differ substantially. In constant SIP scenario, you will be making a total investment of Rs 93.6 Lacs in 30 years. But in increasing SIP scenario, your total investment would be Rs 1.97 Crores (almost twice!).
So does it mean that its better to start with a bigger amount in constant SIP instead of increasing one?? As in both cases…the end result is same – Rs 8.4 crores.

But before you decide, read further…

When we start investing, its not easy to allocate very big amounts towards Mutual Fund SIPs. Suppose you start earning Rs 40,000 as your first salary. You under normal circumstances, will not be able to shell out Rs 26,000 every month. But can easily manage Rs 10,000. And with rising income, you can keep increasing your SIP amounts (Scenario 2). 

Honestly speaking, there is nothing like starting a large SIP very early in your life.

What do you think? What strategies do you use to boost your SIPs?

Case Study – Combining HDFC Top 200 & Recurring Deposit – Part 4

This is the fourth and final part of the SIP Case Study which made use of HDFC Top 200 as the chosen fund. In previous post, I had evaluated the impact of considering the interest accrued on Market Crash Fund. You can read that analysis here.

In this post, I am evaluating the impact of changing the trigger point to one which is dependent on P/E Ratio of the index rather than NAV of the mutual fund (HDFC Top 200 in this case).

So after much deliberations and reader feedbacks, I came up with the following scenario to evaluate:

Scenario 1:

Investment of Rs 10,000 will be split between MF SIP & Recurring Deposits on basis of following conditions:
  • If index PE between 17 and 22, SIP=Rs 5000 and RD=Rs 5000
  • If index PE>22, SIP=Rs 0 (i.e. SIP stops) and RD=Rs 10,000
  • If index 15<PE<17, SIP=Rs10,000 (i.e. SIP doubles) and RD=Rs 0
  • If index PE<15, SIP=Rs 10,000 and RD=Rs 0; and Market Crash Fund (MCF) is utilized as follows – As soon as PE goes below 15, accumulated MCF is split into 3 parts. First part is deployed immediately and remaining two over the next two months.

Simple speaking, MCF Trigger point will be at 15PE. At this point, money accumulated will be split into 3 parts and deployed over next 3 month. SIP investments will stop if PE>22. SIP investments will double if PE<17.

The graph below shows the amount invested in SIP and amount added to MCF for all months starting 1996. I have also added the index PE for the day to show the correlation between the PE and amounts going into SIP and MF (as explained in scenario above).

Correlation between Index PE & SIP+RD Amount (monthly basis)

As usual, the above ‘complex’ scenario was compared with a simpler one below:

Scenario 2

Investing Rs 10,000 every month, without any regard for markets movements, PE levels or for that matter, anything.

Note – Since the chosen fund – HDFC Top 200 started in 1996, I required index PE data starting from 1996. But problem I faced was that index PE data is available starting only from 1999. Hence, from 1996-1999, I chose SIP+RD (Rs 5000 each) irrespective of index or PE levels.

Final Results of Analysis
In first scenario, the total money outgo (put in SIP, used from Market Crash Fund and money still lying in MCF) is Rs 23.1 Lacs. Of this, Rs 12.8 lac is invested as SIP, whereas around Rs 5.5 Lacs was invested in parts, at regular intervals, as and when a trigger points were reached. The money currently available in MCF is around Rs 4.8 lacs, where interest has been considered @ 8% per annum and has been calculated and added to MCF after completion of 12 months. Wherever trigger point is reached in less than 12 months, interest has been ignored for that 12 month period.

There is no change in second scenario and the entire Rs 21.8 lac is invested as SIP of Rs 10,000 every month.

I have chosen the SIP investment (& PE) dates as the first trading day of the month (whether 1st, 2nd, 3rdor 4th…)

So results are as follows:

This time, the pure MF SIP (Scenario 2) delivers Rs 2.46 crores. And a combination of SIP+RD (Scenario 2) delivered Rs 2.47 Crores. If we were to include the money currently available in MCF, it would be Rs 2.52 Crores.

SIP Vs RD Monthly
Scenario 1 & 2 Comparison

So…let see what it means…

It might seem that SIP+MF combination has beaten the pure SIP this time. But in reality, it’s not true. Why?

I have not considered the penal charges & tax implications of liquidating the MCF (via RDs). Though it might not be significant, it still brings down the returns over a period of almost two decades. Another thing to note here is that I have considered interest on RD as 8% calculated yearly. This itself can fluctuate depending on prevalent interest rate scenarios during the last 20 years.

But most importantly, this outperformance of Rs 1 lac (or Rs 6 lac if you consider the accumulated MCF), requires you to monitor PE ratio all through these 20 years and be ready to calculate how much to invest (if PE breaches 15 on lower side or 22 on upper side) every month. Also the charges of starting / stopping RD, and for that matter SIP is also something which needs to be taken into account.

By the way, if you are interested in having a look at the exact numbers, click on the image below:

MF SIP and RD Analysis Since 1996
Full Analysis

Final Comments

So this analysis has once again proved (like previous parts 1, 2and 3) that, for average investors, it is more than enough to continue investing as much as possible every month in a good diversified mutual fund. They should not pay much attention to ups and downs of markets and whether markets are overvalued or undervalued. No need to put your money regularly in a Market Crash Fund (MCF) solely for purpose of investing in MF when markets are down.

PE Ratio of Index & Amount Accumulated in Market Crash Fund

But if you are lucky to have some surplus funds when markets are trading at low valuations (around PE15), then make it a point to invest. Don’t be afraid. People around you would try to convince you not to invest. They will try to tell you that markets will go down further. Please don’t listen to them. Even if it goes down (even upto PE12), remember that it will soon revert back to mean (17-18) and then you will be happy that you invested during the downtimes.

What Will I Do?

Personally, I do maintain a Market Crash Fund (MCF) which is funded by interests, dividends and any surplus income which I generate. And I use this fund for buying direct stocks (as and when I feel that stocks I like, are trading at low valuations). I generally don’t use this MCF for MF investments.

So what will I do going forward? 

The above analysis clearly shows that there is not much point in taking such an approach. And that is because the additional returns generated by this approach do not justify the efforts put in last two decades. But when not buying individual stocks, I might still use my personal MCF to buy MFs in lumpsum. But I will do it only when I am not absolutely sure of which stocks to buy… but I am pretty sure that markets are grossly undervalued and should be invested in.

Case Study – Combining HDFC Top 200 & Recurring Deposit – Part 3

This is the third part of the SIP related Case Study where I compared the performance of following 2 scenarios:

Scenario 1: Investing regularly (Rs 5000) & periodically making lumpsum investments when markets are down. This lumpsum amount would be an accumulation of an additional amount of Rs 5000 every month (+ annual interest@8%), which will be used at one-go when markets are down (at a pre-decided trigger point).

Scenario 2: Investing regularly, double the regular amount (Rs 10,000) over a period of 20 years in a decent, well diversified mutual fund.

The part 2 of the case study was more about reader’s reactions… where many of my assumptions were questioned. And I was glad that readers were very vocal about it as it pushed me to do further analysis. If you haven’t read the feedbacks, I recommend you do it right away here.

In this part (3) of the study, I test a few other scenarios.

Please note that I initially started this study to prove that there ‘should be’ a structured solution, which could make use of following two facts – (1) It doesn’t make sense to stay out of markets at any time – Why? (2) It seems more logical to invest ‘more’ when markets are down.

But as I progressed with my analysis, it started becoming clear that it might be better to stick with simple SIP of mutual funds rather than thinking too much about investing more using a market crash fund. I am using the word ‘might’ as its still possible that people might be using a similar approach and making profitable investments when markets go down. 

But for average investors, it might be a sensible to stick with SIPs.

But nevertheless, I will complete what I started….

Re-Analyzing To Include Interest Component of RD (Market Crash Fund – MCF)

In first scenario, the total money outgo is Rs 21.9 Lacs. Of this, Rs 10.95 lac is invested as SIP of Rs 5000 every month whereas rest is invested in lumpsum at regular intervals as and when a trigger point is reached. The interest on RD has been considered @ 8% per annum and has been calculated and added to MCF after completion of 12 months. Wherever trigger point is reached in less than 12 months, interest has been ignored for that 12 month period.

There is no change in second scenario and the entire Rs 21.9 lac is invested as SIP of Rs 10,000 every month.

After inclusion of interest component, there was expectation that second scenario would be trumped by first one. But still the second scenario seems to have an edge. And this time, the MF+RD combination delivers Rs 2.23 crores whereas a simple MF delivers Rs 2.43 Crores. (without interests, the SIP+RD number was Rs 2.14 Cr)

Trying Out 75%-25% Split for SIP+RD Scenario

A reader had suggested that I should also try out a scenario where SIP+RD combination is more skewed towards SIP. So I tested a scenario with 75%-25% SIP+RD combination. But here also, there were no earth-shattering differences in results. A SIP+RD of 75%-25% resulted in a corpus of Rs 2.33 Cr, which falls short of Rs 2.43 Cr of simple 100% SIP.


I think a lot of effort has already gone in analyzing these scenarios 🙂 But I will like to try out one more scenario. And that is of changing the trigger point to one which is dependent on P/E Ratio of broader markets rather than fund NAV. I will be analyzing this scenario in 4th and last part of this case study. My tentative scenario for evaluation is as follows:

MCF Trigger points will be at 15PE. At this point, money accumulated will be split into 6 parts and deployed over next 6 months (if PE remains less than 18). For pausing investments in regular SIP when 22PE is achieved, the money which was supposed to flow into SIP will be added to MCF. Once markets go down below 22PE, regular SIP will commence. But trigger point for MCF deployment will remain at 15PE.

Let me know if this scenario sounds fine to you all….or if something more needs to be added here.

PS – I know I am complicating things. But lets just finish what we started. 🙂

Case Study – Combining HDFC Top 200 & Recurring Deposit – Part 2 (Reader’s Reactions)

The Case Study post where I tested the following scenario (hypothesis) generated quite a lot of discussion.

Investing regularly (Rs X) & periodically making lumpsum investments* when markets are down, will fetch higher returns than regularly investing double the regular amount (Rs 2X) over a period of 10-15 years in a decent, well diversified mutual fund.

* This lumpsum amount would be an accumulation of Rs X every month, which will be used at one-go when markets are down (at a pre-decided trigger point).

After going through all comments, I thought it would be beneficial, to do a follow up post highlighting the major points brought forward by the readers.

At the end of the post, I had posed a few questions as I myself was not sure how to interpret the results achieved.

– How is it that a simple MF of Rs 10,000 a month beats a combination of Rs 5000 a month MF and lump sum investments when markets are down?

– Is it something about the assumptions that went wrong?

– Is it that trigger point should have been either more than 20% or less than that?                  

– Is it wrong to split the investment amount into 50%-50% for SIP & RD in first scenario?

– Is it because of the extraordinary bull runs of 2003-2008 that this analysis went for a toss?

– Is it that HDFC Top 200 has been a stellar fund and any other fund would have given results in line with hypothesis?

– Is it entirely wrong to do this comparison at all?

Readers of the post had a lot of views about all the questions above. This post shares those thoughts and ideas….

So over to readers…for reactions and brickbats 🙂
On Ignoring the Interest component of RD (Market Crash Fund)

Shan: You can’t ignore interest.

Saurabh: Definitely interest should be factored in the calculation. And that is because we are considering very long periods of RD 1996-2000, 2002-2008, 2009-2011 and 2012-14. Even at a conservative 9% (it use to be higher in the late 90s), that would mean that the money would have compounded by 1.4 times for every 4 year period.

Jay: I know a lot of readers have mentioned RD interest component but that’s beside the point that you are trying to make and my guess is even if included won’t amount to a whole lot which was the expectation to begin with.

Dhanesh: You haven’t added any interest for reserve money for simplicity. I think it is highly distorting the conclusion.

In next part of this case study, I will be redoing the calculations where interest in recurring deposits will be included.

On Choosing 50-50 Split

Jay: The split too sounds good to begin with. I guess you could try a 75-25 (SIP-RD) as well.

Ajay: I think a simple SIP in HDFC Prudence for full amount would have provided a Rs 2.17 Crore return. A RD cannot be broken without penalty at given time (that is when the trigger point is reached). Also the interest is taxed. A 25% Debt folio takes care of the equity to debt and vice versa shifts without any tax implications and hassles to investor.

In next part of this case study, I will try out the 75-25 combination. As far as Ajay’s idea is concerned, I think it’s a practical way of achieving what I wanted to using a combination of MF+SIP.

On Choice of Fund

Anand: To start with, having a MF (and that too one tracking top 200 stocks) may introduce too many variables (basically active management comes into picture). Instead, you might want to do same analysis with a pure index fund.

I could have tried using an index fund for further analysis. But I think it would have still resulted in similar results…with only difference being the degree of over- or under- performance.

On Choice of Trigger Point

Anand:  Instead of NAV, you might want to use the PE ratio. 

Dhanesh: One major problem with your model is your trigger point. You are using historical high value as trigger point which I believe is wrong anchor. Historical high is like 52W High / Low price of stock, buying a stock comparing 52W High and current price will give mediocre return. I think appropriate trigger point should be NSE200 or BSE200 PE. Your old post on PE ratio should be a good guide to choose appropriate PEs. I like PE -15 as a good trigger point. Once trigger point is reached, I think money should be systematically transferred to Equity over 6 month’s period. I also think there should additional trigger at PE 22, which should warn investors to systematically withdraw money.

Ajay: One of the options is to see the entry points via PE of index, but here always low PE is always accompanied by bad news so no one goes and invest more at that point. If the investor is ready to base it only on PE, a investor should stop investing in equity at 20PE and should start investing in debt funds and wait for investment opportunity below say 13PE lumpsum investment. But getting it below PE of 13 or so is not that frequent in our market. If you look at records, it is only few time it touched that level and at that point you are flooded with negative news, so do one dare to invest.

This was an interesting thought of choosing a trigger point based on market valuations. I would personally have done this too but as explained in comments of previous post too, I decided to stick with data points which were all linked to the chosen fund. But nevertheless, I tried analyzing the results using following scenario:

Trigger points will be at 15PE. At this juncture, money accumulated will be split into 6 parts and deployed over next 6 months (if PE remains less than 18). As far as pausing investment post 22PE is concerned, I will see if I can include that in my analysis due to lack of time at my end. 🙂 (I hope you all will understand)

General Reactions /Suggestions by Readers

Saurabh: Based on their age, people should keep a part of their money in cash and multiply it using FD/RD. Another part should constantly be used for doing MF SIP. And another part should be used to pick stocks if the person knows what he is doing. For a 30 year old, I’d do a 10-40-50 split. I don’t have the data but I feel that money kept in MFs as SIP for 20-30 year period should do very well because some of the best money managers know where to park the money during bad days so that they outshine during the good days.

Abinash: It is always a good idea to continue running SIP and separately make a 2 year fund, And when markets crash, put one year fund as lumpsum… I know if you consider the RD interest component in your analysis too, it will definitely beat the return.. But truly how many of us can do this? 

Govar: While I agree that SIP would be the best approach for a period of 20 years, the problem is you don’t know if you can really leave the money alone for 20 years. There are several milestones that could disrupt the process. So I don’t do a SIP in an over-valued market (PE of 21+). My plan is to systematically accumulate cash (via arbitrage funds since LT returns are tax-free) and balanced funds when market is hot (PE 21+), invest in Equity MFs below PE 21 and pump in cash when valuations are really down (18 and below).

Jay: Instead of having a single trigger to dump all RD monies, we can have sequential triggers for step wise deployment. But it may make things complicated, so why not stick with pure SIP.

Abhijit: As far as I can think, the reason behind surprising results in previous analysis, is the fact that half of the invested amount earns less than what stock market earned during period. Ex – Even if you start investing when NIFTY was around 1000 in June 2003, it runs up to market peek in 2007 and crashes to around 2700 in December 2008, the CAGR is 19% (even after crash). If you would have put 50% of invested amount in cash/FD earning lesser returns, you are losing on the total returns even though that amount gets invested at 2700. The most probable reason of your results being surprising seems to be the great bull run from 2003 to 2007. Had the market traded sideways or moderately bullish then your results could have been as expected. i.e., Equity + Crash fund returns greater than pure equity.

I think everyone made quite a good number of suggestions and I think Abhijit’s reasoning of surprising performance makes a lot of sense.


[Edited on 13-Jan-2015 After Publishing]

Ajay: This is in reference to point made (underlined above) about comparing lump sum returns of investments made with Nifty (@1000) in 2003 and upto 2008 with Nifty (@2700)

Argument of 1000 to 2700 here is for a lumpsum investment. Who has got all the money and guts to invest for goals on a given day towards the goals? You can invest as a lumpsum without bothering too much about valuations only if you are investing for 10 or 15 or 20 years period. And then there would be no need to do any SIP.

The discussion here is about SIP. If one had invested in HDFC TOP 200 from 1st June 2003 to 1st Dec 2008 and see the return on 2008 Dec (say equal value of 5000 throughout this period) then the returns are as follows:

SIP Mode
No. of Installments – 66, Total Investment 3,30,000 and Fund Value on 01-Dec-2008 is 4,54,041, IRR 11.5%

Lumpsum Mode
3,30,000 invested on 1st June 2003, the fund value on 01-Dec-2008 is 13,39,429 (nearly 4 times the return due to bull market followed by a crash)

If the SIP end date is changed as 1st March 2009 and value as of 11th March 2009 are as shown below:

SIP ModeNo. of Instalments – 70, Total Investment 3,50,000 and Fund Value on 11/03/09 is 4,39,368, IRR 7.85%

Lumpsum Mode
3,50,000 invested on 1st June 2003, the fund value on 11/03/09 is 13,17,941 (still nearly 4 times the return due to bull market)

Moreover, the index moved from 1006 to 2669 by Dec 08 and 2620 by March 2009. Also, instead of looking 1000 and 2700, the PE ratio at 1006 was 11.59 and PE ratio at 2669 was also 11.76.

Any lump sum investment made at this very low PE entry point will give substantial return over the next 5 to 7 year period. However those entry points are rare occurrence. So, it is unfair to use it for justifying the lumpsum investment mode. If you do the same with the entry point on 1 Jan 2008 period (at peak valuation, even the lump sum return after 5 years will look meagre).

If one had invested in HDFC TOP 200 from 1st Jan 2008 to 1st Jul 2013 and see the return on July 2013 (say equal value of 5000 throughout this period) then the returns are as follows:

SIP Mode
No. of Installments – 66, Total Investment 3,30,000 and Fund Value on 1/07/13 is 4,30,696, IRR 9.6%

Lumpsum Mode
3,30,000 invested on 1st Jan 2008, the fund value on 1/07/13 is 4,14,914 (it is a meagre return).

Index on 1st Jan 08 was at 6144 and PE ratio was 27.64 and on 1st July 2013 it was at 5898 and PE was 17.87.

This proves the point that unlike SIP, for lump sum investing market valuation and index value is very important.


In next part, I will share the analysis of various other scenarios.

Case Study – Surprising Results of combining HDFC Top 200 & Recurring Deposit (Market Crash Fund)

We always think that it is best to invest when markets are down. But how often are we able to do it? Not regularly.


There are 2 reasons.

First – The markets don’t go down regularly.

Second – When they do go down, we don’t have the guts to go out there and invest. And that is because, either we don’t have the money to invest AND / OR we don’t know where to invest.

And frankly speaking, both are genuine problems. It happens to me, you or almost anyone I know.

I was just thinking about this whole scenario of investors feeling handicapped when markets go down. They want to invest. But don’t know where to invest. And if they do know where to invest, then they don’t have funds to do it.

So is there a solution to this problem?

I think there is. Atleast I thought there was. 🙂

I am not sure though.

And if there is a solution, then it is ought to be based on the following two thoughts:

First is that it does not make sense to stay out of markets at any time. I covered this topic a while back at – Why You Should Invest, Even if You can’t Beat the Market.

And Second is an extension of the above thought – it seems wiser to invest ‘more’ when markets are down.

So how do we use these these two (thoughts) in combination to gain the maximum benefit?

I came up with a very primitive hypothesis:

Investing regularly (Rs X) & periodically making lumpsum investments* when markets are down, will fetch higher returns than regularly investing double the regular amount (Rs 2X) over a period of 10-15 years in a decent, well diversified mutual fund.

* This lumpsum amount would be an accumulation of Rs X every month, which will be used at one-go when markets are down (at a pre-decided trigger point).

To test this hypothesis, I chose HDFC Top 200 as the fund. The choice of fund was because it is a stable, well known and proven fund. And my guess is that If you had to choose a fund blindfolded, chances are you would choose HDFC Top 200. Ask anyone and almost always, this fund’s name pops up.

So coming back to the analysis, I went ahead and used last 20 years data to prove my hypothesis.

There are 2 scenarios being compared here:

First is where Rs 5000 is invested every month in HDFC Top 200. An equal of Rs 5000 is also parked every month in a Recurring Deposit which I call Market Crash Fund. (I am ignoring the interests accrued for simplicity). The money keeps accumulating in this market crash fund till the time a trigger* point is reached.

Second scenario is where Rs 10,000 is invested in HDFC Top 200 every month. Plain and simple.

*The trigger point for utilizing the market crash fund is when the average monthly NAV of the fund is at more than 20% discount to highest average NAV, which has been achieved in last 3 years. For example, if the fund reached a maximum NAV of Rs 100 in last 3 years, and the current NAV touches 79 (i.e. 21% discount) – then entire money accumulated in Market Crash Fund is used to buy units of Mutual Fund at lower NAVs.

So with these assumptions, lets see what happened.

Starting October 1996, the total money outgo in both scenarios is Rs 21.9 Lacs. In first scenario, Rs 10.95 lac is invested as SIP of Rs 5000 every month whereas rest is invested in lumpsum at regular intervals as and when a trigger point is reached. In second scenario, entire Rs 21.9 lac is invested as SIP of Rs 10,000 every month.

But here comes the surprising part. The returns of above strategies are not in sync with my expectations. My expectation was that the MF+RD combination which shifts money from RD into MF when markets go down, will beat a simple MF SIP of amount equal to MF+RD monthly investment.

But results are completely opposite.

The MF+RD combination delivers Rs 2.14 crores whereas a simple MF delivers Rs 2.43 Crores.
HDFC Top 200 Analysi
Value of Investments in HDFC Top 200 in both scenarios
In the graph below, the dark blue line indicates the value of Market Crash Fund which accumulates Rs 5000 every month till the trigger point (Current NAV < 80% of Max NAV in last 3 years) is reached. The light blue area graph shows how low is current NAV (in %) with respect to maximum NAV in last 3 years.

HDFC Top 200 Lump Sum Investments
Lump Sum Investment Trigger Points (On Basis of current & last 3 years NAV)

Big figures indeed for small Rs 22 Lac investment. Isn’t it?

But what about the hypothesis?

How is it that a simple MF SIP of Rs 10,000 a month beats a combination of Rs 5000 a month MF and lump sum investments when markets are down?

Is it something about the assumptions, that went wrong?

Is it that trigger point should have been either more than 20% or less than that?                    

Is it wrong to split the investment amount into 50%-50% for SIP & RD in first scenario?

Is it because of the extraordinary bull runs of 2003-2008 that this analysis went for a toss?

Is it that HDFC Top 200 has been a stellar fund and any other fund would have given results in line with hypothesis?


Is it entirely wrong to do this comparison at all?        

I am not sure if I know answers to these questions.

What do you think? Do let me know of your thoughts about the idea of splitting money (MF & RD) as done in first scenario and also about my assumptions regarding trigger points.